Reverse mortgages

The younger you are, the less you can borrow

If you are thinking about extracting some of that equity to give yourself extra income in retirement, financial planners urge you to consider the pros and cons of such a strategy very carefully.

Photograph by: Thinkstock
, Postmedia News

When we reach retirement the goal for many of us is to have paid off our mortgage, leaving us with full equity in our homes. If you are thinking about extracting some of that equity to give yourself extra income in retirement, financial planners urge you to consider the pros and cons of such a strategy very carefully.

"I work with all my clients to make sure that they don't have to access their house money to fund their retirements," says Vikas Saida, a financial advisor with Edward Jones in Mississauga. "The most important thing is to plan well ahead so that this stage is never reached."

Mr. Saida says he stays in close contact with his clients to make sure their retirement plans are on track so they are not compelled to extract equity from their homes.

"People need to balance their expectations and their achievable goals," Mr. Saida says. "We need to make sure that the investments they have in their portfolios are in line with their risk-tolerance levels and their goals are achievable."

However, if circumstances change and you require a new source of income, perhaps for unexpected medical expenses, a mortgage advisor can help you assess if a reverse mortgage is appropriate.

"A reverse mortgage is an instrument where you do not have to prove income or credit worthiness. You're not required to make payments," says Gary Siegle, regional manager, Alberta South and Saskatchewan, Invis. "You get a certain amount of money and your mortgage balance increases at an established rate over the period of the reverse mortgage."

Mr. Siegle checks with clients to determine whether they have sufficient income to qualify for a regular mortgage before discussing a reverse mortgage.

The calculator on chip.ca will help test out how much you may be able to borrow.

"It will depend on your age and the amount of equity that you do have in your home," Mr. Siegle says. "They do not collect payments from you, it is just the interest that keeps accruing. You have the option, if you wish, to make payments, but you do not have to."

The younger you are, the less you will be able to borrow.

Reverse-mortgage providers make assumptions as to what your house will be worth down the road, when your estate is settled.

"If your house is worth $400,000 and you borrow $200,000, [and the interest rate on your loan remains at 5%] and your house value of $400,000 grows at 3% a year, your house is going up $12,000 a year, your interest is accruing by $10,000 a year," Mr. Siegle says. "Your house value is going up somewhat more quickly than your debt. Even if you live until 80 and you are now 60, there will still be money to turn over to your estate."

The reverse mortgage debt will have to be paid by your estate, reducing what your beneficiaries will inherit.

"Clients should review their objectives frequently," Mr. Saida says, "so that [they don't even get to the] stage of withdrawing money from their house's equity or their fixed assets."

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